Invert, always invert!
My left fist is clenched at the back of my neck.
My right hand is holding a pen like a dagger and my jaw muscles are tight and sticking out.
That was me trying to work difficult math problems back in school. If somebody, anybody, had introduced me to Carl Jacobi, it would have saved me a lot of heartache.
Who is Carl Jacobi anyways?
None other than the German 19th century mathematician all-star. Unlike me, when Jacobi encountered difficult problems, he was fond of saying;
Invert, always invert.Sound familiar? Yes. Charlie Munger took the lesson from Jacobi and introduced it to value investors.
While math problems are less of an issue in investing, the multi-disciplinary approach is highly relevant and useful.
Investing is full of variables and problems that leave me dumbfounded.
So what should a guy like me do?
Invert, always invert.
Common “Verted” QuestionsOne of the most common things you do when you approach a stock is to estimate intrinsic value in the long run.
How much is it worth?
How much will I make?
How long will it take?
Categorize these questions as forward looking.
If the growth prospects are there, or if it looks like the next big thing, these questions help you jump on the bandwagon.
E.g. it’s easy to join the mad dash with the hottest thing like the Social Media ETF (SOCL). After all, the internet is only going to grow as more devices are used by people to be constantly connected.
But with every investment there are two sides to the story, and the other side is what Jacobi and Munger want you to think about.
Invert, Always Invert. 5 Inverted Investing QuestionsThe purpose of investing is to make money. To make money, there are two main ways.
- “Risk equals reward” style of investing
- Conservative style by focusing on not losing money
Rule No. 1: Never Lose Money.Unless you and I are trained, the most common way to think is the first option. However, to get to Buffett’s playing field, it takes lots of trial and error to get from “how much can I make?” to “how do I not lose money?”.
Rule No. 2: Never Forget Rule No. 1.
Same destination. Different road taken.
Here are the top 5 inverted questions I like to ask myself when looking at stocks. It helps me break up the mindset of trying to find bullish reasons.
- How can I lose money? vs How can I make money?
- What is this stock NOT worth? vs What is this stock going to be worth?
- What can go wrong? vs What growth drivers are there?
- What is the market implied discount rate? vs What is a fair discount rate?
- What is market implied growth rate? vs What is the future growth rate?
- If this drops 50% today, will I buy more? vs When will I sell?
What about you? What inverted questions do you ask yourself?
About the author:
Jae JunFounder of Old School Value (http://www.oldschoolvalue.com) dedicated to offering the most complete and detailed stock valuation and analysis spreadsheet. Investing made easy by importing 10 years of financials and 5 quarterly statements directly to excel for your analysis needs. Save time, make smarter decisions and make more money.